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Why The Covid Crisis Is A Pivotal Moment For Renewables

The global energy and travel industries have been some of the hardest hit by the coronavirus crisis, with the energy market experiencing its biggest shock post-WWII. Widespread lockdowns have resulted in energy demand plummeting, dwarfing the decline recorded during the 2008 financial crisis.

A new report by the International Energy Agency (IEA), based on analysis of 100 days of data, states that global energy demand in the current year is set to plunge 6% Y/Y, the equivalent of losing the entire energy demand of India.

The silver lining, though, is this: A global economy on the skids is leading to the biggest drop in CO2 emissions on record with renewables playing an even more prominent role in the electricity generation mix.

The bad news removes some of the shine: Oil demand is set to experience the biggest contraction of all major energy sources.

The projections range from bad to dire, depending on how fast the global economy will be able to recover. With Gilead Sciences (NASDAQ:GILD) Covid-19 drug remdesivir recently receiving the green light from the FDA and Sorrento Therapeutics (NASDAQ:SRNE) announcing on Friday that it has discovered an antibody that can not only provide 100% inhibition of Covid-19 but also flush out the virus in just four days, the whole world is waiting with bated breath.

Here are some key takeaways from that IEA report.

#1 Global energy demand falls 6%

The energy watchdog has modeled three separate scenarios for the global energy trajectory: Limited containment measures; Partial lockdown, and Full lockdown.

Energy demand fell by 3.8% Y/Y during the first quarter; however, demand is likely to fall even further during the current quarter as most parts of the world continue being under various degrees of lockdown.

The IEA says annual energy demand is likely to drop 6% in 2020 if recovery is slow across most regions, and the lockdowns last for many months. At first glance, that might not sound like a whole lot, but consider that it’s the biggest contraction in 70 years and ~7x the shrinkage experienced during the last financial crisis.

The IEA, though, says that energy demand might only fall 4% if efforts to contain the virus are successful and more economies are able to restart quickly.

#2 Record drop in CO2 emissions

The IEA points out that the massive decline in energy demand is good for the environment in the short-term because annual CO2 emissions are set to fall at unprecedented rates.

Indeed, the organization has predicted that CO2 emissions in 2020 will not only fall by the biggest margin ever but will also be nearly twice as large as all previous emissions declines post-WWII combined.

Global CO2 emissions fell 5% in Q1 mainly due to an 8% decline in coal emissions--4.5% from oil and 2% by natural gas. For the full year, IEA expects global CO2 emissions will clock in at 30.6 Gt, nearly 8% lower than the previous year.

That’s a nearly 2.6 Gt decline. For perspective, consider that’s more than 6x bigger than the previous record of 0.4 Gt recorded in 2009.

The United States will contribute the most to that fall at 600 Mt with China and the EU following closely behind.

#3 Renewables buck the trend

In a past article, we bemoaned the fact that the U.S. government appears willing to go to much greater lengths to save the fossil fuel industry than invest in clean and renewable sources. For instance, the federal government has unveiled a $750 billion bond buyback scheme to benefit thousands of struggling companies, including hundreds in the coal and fossil fuel sector.

The good news, however, is that the IEA has reported that so far, the renewables sector has proven to be the most resilient during the ongoing crisis.

Indeed, global use of renewable energy grew 1.5% Y/Y during the first quarter with renewable electricity generation increasing nearly 3% mainly due to new wind and solar PV projects completed over the past year coming online. Renewables tend to be more resilient to lower electricity demand than other sources mainly because they are generally dispatched first due to favorable regulation and/or their lower operating costs. Indeed, IEQ reports that renewables’ share in the global electricity generation mix jumped to 28% during the first quarter from 26% by the end of 2019, mainly at the expense of coal and gas.

For the full year, IEA expects global use of renewable energy to increase by 1%. Meanwhile, the expansion of wind, solar and hydropower is expected to help renewable

electricity generation to grow 5% in the current year.

#4 Oil demand suffers biggest drop

According to the IEA, virtually all fuels except renewables are set to experience record declines in demand. However, oil is expected to take the biggest hit with global demand suffering a 9% fall.

The oil demand slump is to be expected, given that the transport sector drives nearly 60% of global oil demand. Road transport fell 50% during the first quarter due to widespread lockdowns while air travel fell 90% in some countries and 60% across the globe.

Crude oil demand for the full year is expected to come in 9.3 mb/d lower compared to the previous year with containment measures in 187 countries bringing global mobility to a near halt. April posted the biggest fall at 29 mb/d with Q2 demand expected to be 23.1 mb/d lower compared to the previous year’s corresponding period. Demand is expected to gradually recover as the months roll on with a 2.9 mb/d Y/Y decline penciled in for the final month of the year.

On a brighter note, the IEA says oil demand might only fall by 6.5 mb/d if many countries quickly come out of lockdowns and economies bounce back rapidly.

#5 Natural gas power generation collapse

Natural gas has become a new favorite for utilities and power producers because it’s viewed as a bridge between dirtier coal and renewables. Further, natural gas is less exposed to demand shocks experienced by transportation fuels like gasoline and jet fuel.

Nevertheless, the natural gas market is still expected to remain in dire straits due to a collapse in electricity demand and the fact that the market was already suffering from oversupply well before Covid-19 struck due to the shale boom and historically mild temperatures in the northern hemisphere.

Gas demand fell 3% in Q1 but is expected to fall by as much as 5% for the full year marking the largest recorded year-on-year decline in consumption since the world started using the fuel on scale during the second half of the last century. This will mainly be driven by a 7% fall in gas consumption in power generation, accounting for 60% of the decrease in global demand. The decline is expected to be in line with a 5% fall in electricity demand for 2020, meaning it might not be that bad if the global economy manages to stage a quick rebound.

Renewables remain vulnerable

Whereas renewables have emerged as the biggest winner in this report, it’s important to note that the mid-term outlook remains rather shaky.

This is because the latest gains by the industry have been coming from projects that were completed in the recent past with the IEA previously warning that the crisis could wipe out billions of dollars in clean energy investments. Though still impressive given the backdrop, the growth rates being recorded for the industry are well below previous projections. For instance, EV sales are expected to crash 43% in the current year while Wall Street foresees sharp cutbacks in wind, solar, and battery growth in the U.S in the current year.

Nevertheless, the clean energy sector is still likely to emerge from the global health and financial crisis in much better shape than the fossil fuel industry.

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